Thursday, April 26, 2007

Is It Time To Buy Tech?

It's been 7 tough years since tech stocks peaked in 2000. However, the Composite and NDX are back at new 6 1/2-year highs and popular tech names such as AAPL, AMZN, INTC, GOOG and many others are all showing strong results. Does this mean that it's finally time to buy tech stocks again?

Analyst comments are one approach to answering this question. However, when it comes to your money, the market itself typically offers a less partisan view. Fortunately, ratio charts can be particularly helpful in sorting out these types of questions.

Below is a 7-year ratio of the Dow Jones US Technology Index ($DJUSTC) and the NASDAQ. The $DJUSTC is made up of 212 component stocks across all tech sectors and market-caps. This diversity gives it an advantage over the NDX, which is only about 70% tech and strictly large-cap.

In a nutshell, when the Tech Ratio is climbing, tech stocks are outperforming the NASDAQ. Once it moves high enough, the market itself -- and not some analyst -- is telling investors that conditions for tech stocks have become favorable again.

The chart below shows that even though October 2002 was the bottom for the broader market, it certainly wasn't for technology. After falling together for 3 years, the NASDAQ and the Tech Ratio diverged in early 2003. The NASDAQ continued to improve, but tech stocks kept falling. It's surprising to see that -- relative to the rest of the market -- technology didn't actually put in a convincing bottom until just this past summer after the May 2006 correction.

The inverted H&S pattern looks promising, but from this perspective tech is clearly not yet out-of-the-woods. A good first step would be to climb back above the 40-week.

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The chart below zooms in on the past 12 months. After the strong rally off the summer 2006 bottom, tech stocks peaked in Oct, but have steadily weakened ever since. The Tech Ratio is back above its 50-day, but the more formidable 7-month trendline lies just ahead.

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While the NASDAQ and NDX have improved dramatically -- and individual names can be attractive buys -- the Tech Ratio shows that technology as a whole continues to be weaker than the broader market. Until the Ratio pushes through important resistance, it's too early to make a broad Buy call on tech. Since we all know many individual stocks are doing well, this chart is also a good reminder of just what a stockpicker's market this really is.

As a final point, skeptics often stress that the market is vulnerable because of the obvious non-performance by tech stocks. However, the NASDAQ has reached 6 1/2-year highs without the help of technology.

Imagine what's going to happen once the next cyclical tech phase finally kicks in.

As things develop with the Tech Ratio, I'll keep you posted.



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